Author: Dominic Lay, Associate Director, K3 Tax Advisory
The Employee Ownership Association (EOA) has recently published a report about Employee-Owned Businesses (EOBs). The report highlights how EOBs are a growing ownership model in the UK and globally. It also looks in detail at the impact that employee ownership can have on a business.
The Employee Ownership Association (EOA) has recently published a report about Employee-Owned Businesses (EOBs). The report highlights how EOBs are a growing ownership model in the UK and globally. It also looks in detail at the impact that employee ownership can have on a business.
See the full EOA report here: EO Knowledge Programme.
At K3 Tax Advisory and Quantuma we are involved with advising business owners on the sale of their company to one of the most popular forms of employee ownership, an Employee Ownership Trust (EOT). As reported by the EOA, the number of employee-owned businesses is largely driven by the number of new EOTs each year.
It’s popular because it works for everyone
EOBs are an increasingly popular ownership model that tend to be positive for all parties involved.
- Employees are better trained, paid, retained and overwhelmingly report increased job satisfaction.
- The change to employee ownership tends to result in faster growth, both in employee numbers and profitability.
- External stakeholders tend to benefit as well – EOBs tend to be more involved with their local communities and have more focus on indirect issues such as climate change.
There has been a steady rise in employee-owned business in recent times as the UK has seen:
- over 1,650 businesses have chosen employee ownership to date,
- approximately 330 new employee and worker-owned businesses (EOBs) emerge in the past 12 months, and
- a 16.2% average annual rise in the number of employee-owned businesses in the last decade.
We cover some of the benefits in more detail below.
Tax benefits
Specifically looking at the benefits of an EOT ownership structure here:
A sale to an EOT can be tax-free
If the shareholders sell a controlling share in their company (anywhere from 51% to 100% of share capital) to the EOT and all other conditions are met, the sale is tax-free. This incentive must be a driver of the number of company sales to EOTs as shareholders can realise an additional 10 – 20% proceeds compared with a sale to a third party (depending on the availability of business asset disposal relief).
Employees can receive income tax-free bonuses
Employees can receive bonuses which are income tax-free (but not NIC free) up to £3,600 per annum if various conditions are met.
Commercial benefits
Employees
In our experience, the impact on employees of a business sale is forefront in the seller’s mind when considering employee ownership.
The good news is that, as expected, employee ownership is overwhelmingly positive for the employees of the business. I’ve picked the following key facts from the EOA report:
- Training: 93% of EOBs compared to 85% of non-EOBs provide on-the-job training to employees and spend on average £38,000 more on training per year.
- Reward: EOBs pay out twice as much in bonuses and dividends to employees.
- Job security: EOBs are five times less likely to make them redundant.
- Participation: 69% of EOBs compared with 33% of non-EOBs have employee representatives at the highest level of management. For EOTs in our experience, this is 100%.
- Happiness: 73% of businesses that have transitioned to employee ownership reported an increase in employee job satisfaction.
Performance
So how does the investment in and involvement of employees in strategic decision-making impact an employee-owned business's financial performance? The report from the EOA feeds back the following results from their research:
- Productivity: employee-owned companies are 8-12% more productive in terms of gross value added per employee,
- Profit: 57% reported profits increasing since becoming EO, and
- Profit: EOBs are over 25% more likely to have seen profits increase in the last five years than non-EOBS.
Employee ownership - a win-win situation
It is not surprising that employee ownership is an increasingly popular ownership model and selling to an EOT is becoming a well-trodden path in terms of the options available to business owners who are looking to sell. Feedback from businesses that have already adopted employee ownership show a win-win situation, their employees tend to be better trained, more engaged and happier, and the businesses tend to be growing and more profitable.
Examples of well-known EOT businesses
There are hundreds of businesses that have transitioned to employee ownership using an EOT. Some of the bigger household names include the UK’s biggest animation production company Aardman Animations, and outdoor adventure company Go Ape.
Examples of businesses we have advised on
Quantuma and K3 Tax Advisory and have helped a variety of well-established owner managed businesses transfer into an Employee Ownership Trust over the last 12 months including Grosvenor Credit Management & Investigations Limited, ABC Glass Processing and The Specialist Blind Co. Limited.
Get in touch
If you would like further information, visit our dedicated EOT page where you can download our free guide to employee owner trusts, or contact our EOT specialists:
 Adrian HowellsManaging Director adrian.howells@quantuma.com |
 Holly BedfordManaging Director holly.bedford@quantuma.com |
Quantuma provides support with tax issues through our sister company K3 Tax Advisory, a specialist tax advisory firm.
